Tc10 ba 2011

1. STRICTLY CONFIDENTIAL
THE PUBLIC ACCOUNTANTS EXAMINATION
COUNCIL OF MALAWI
2011 EXAMINATIONS
ACCOUNTING TECHNICIAN PROGRAMME
PAPER TC 10(B): TAXATION
(JUNE 2011)
TIME ALLOWED: 3 HOURS
SUGGESTED SOLUTIONS

2. 1
SECTION A
ANSWER BOTH QUESTIONS IN THIS SECTION
1. (a) (i) Mr Khangamwa’s Taxable Income Tax Year to 30 June 2010
Profit before tax
Add back:
Withholding tax on interest
Donations to local church
Private motoring
- Fuel and lubricants
- Road permits and licences
- Vehicle maintenance
-
Penalties and fines
- Late submission of tax return
- Traffic offence fine
Legal expenses
Depreciation
Fringe Benefits Tax
Interest (10)
Less: Capital allowances 625
K’000
62.50
75
276
22.5
375
37
33
20
560
60
K’000
18,750
1,521
20,271
625
19,636
Notes for Markers
Workings under note 1 (not additional marks)
Determination of withholding tax on bank interest:
Net interest recorded : K250,000
Rate of withholding tax 20%
Grossing up = 250,000 x 100
80
Gross interest = 312,500
Less interest = 250,000 ½ interest 62,500
1. Under Note 3 K,000
Determination of private motoring:
(1) Fuels and lubricants
Total cost : 920,000
30% there on : 920 x 30
100
= 276,000

3. 2
2. Road permits and licences
Total cost : 75,000
30% thereon : 75,000 x 30
100
= 22,500
3. Vehicle maintenance
Total cost : 1,250,000
30% thereon : 1,250,000 x 30
100
= 375,000
(ii) Computation of net tax payable
Tax payable on K19,636,000
1st
120,000 @ 0% = 0 ½
Next 36,000 @ 15% = 5,400 ½
Balance 19,480,000 @ 30% = 5,844,000 ½
5,849,400
Total tax as above 5,849,400
Less: Withholding tax on interest 62,500 ½
Withholding tax on rent 35,000 ½
Provisional tax 1,450,000 ½ 1,547,500
4,301,900
(b) The donation to local church is disallowed because the local church is not
approved according to the Taxation Act.
(c) Declaration of a company’s county of incorporation is significant because the
Malawi tax law imposes an additional tax of 5% on companies that are
externally incorporated.
The declaration therefore helps the Revenue Authorities decide on whether to
impose the additional tax or not.

4. 3
2. Computation of capital allowances – Year to 30/06/09
WDV 30/6/09
Less: disposals
Additions
Less: investment
allowance
Less: Initial allowance
Less : Annual allowance
Factory
Building
K’000
7,600
- __
7,600
2,900
10,500
(2,900)
-
(380)
7,220_
Plant &
Machinery
K’000
5,200
(1,870)
3,330
2,200
5,530
(2,200)
-
(333)
2,997
Motor
Vehicles
K’000
2,700
-___
2,700
6,400
9,100
-
-
(1,820)
7,280
Furniture
& Fittings
K’000
940
-__
940
750
1,690
-
(150)
(169)
1,371
Notes for markers
The following are not additional marks but for noting.
(1) Factory building
K
Additions are made up of fencing: 1,400
offices : 1,500
2,900
Investment allowance at
100% = 1,400
1,500
2,900
(2) Plant and machinery K’000
Proceeds 1,700
Gain 250
WDV 1,450 +
TWDV for scrap 420
Total TWDV 1,870
(3) Motor vehicles
Additions are made up of two vehicles
K’000
Saloon 2,200
Double cabin pickup 4,200
6,400

5. 4
(b) Why capital allowances are claimed in respect of fencing and offices.
Fencing
Fencing of an industrial building is deemed to be an essential
protective fencing and as such, such fencing becomes part of industrial
building and therefore eligible for capital allowances.
Offices
Expenditure in respect of offices is eligible for capital allowances
because:
- offices are attached to the factory building and therefore part of the
industrial building; and
- the expenditure in respect of the offices is less than 20% of the
cost of the whole structure, factory building includes offices.
Proof
Original cost of the factory building K12,000,000
Additions : fencing 1,400,000
offices 1,500,000
14,900,000
Proportion of expenditure in respect of offices to the expenditure of the
whole structure:
1,500,000 x 100
14,900,000
= 10.07%
This is less than 20%
(c) For the purposes of determining the taxable income of any taxpayer, there
shall be deducted from the assessable income of such taxpayer the amount
of any capital loss realized by the taxpayer in the year of assessment, but
to the extent only of either.
(i) the capital loss
(ii) any capital gain realized by the taxpayer in that year of assessment whichever
is lesser.
(d) ‘Disposal’ in relation to an asset means transfer of ownership of an asset
by whatsoever means including but not limited to:

6. 5
sale
gift
bequest
distribution or
exchange
SECTION B
ANSWER THREE QUESTIONS ONLY FROM THIS SECTION
3. (a) (i) It is called double taxation.
(ii) This arises because of:
- differences in bases of taxation in different countries
- some countries use source while others use residence when
taxing revenue.
This can be mitigated or prevented by:
- entering in Double Tax Agreements with other countries
- provisions in the Taxation Act, that allows deductions of
foreign tax.
(iii) Circumstances under which wife’s emoluments may not be treated as
wife’s earned income are:
(1) When income is not derived in her own right i.e. where
husband is the employer or partner.
(2) The emoluments from employment received or accrued to or in
favour of the wife where the employer is
- her husband
- a partnership in which the husband is a partner
- a company in which the husband is a director who
controls directly or indirectly more than 5% of voting
rights attaching to all classes of shares of the company.
- a company in which the wife is a director who controls
directly or indirectly more than 5% of the voting rights
attaching to all classes of shares of the company and in
which the husband is employed or is a director.
(b) (i) Exchange gain or loss on transactions. Calculation of gains or losses:
Formula ar1 – ar2
Where a – amount of foreign currency

7. 6
r1 – rate of exchange at the date of establishing liability
r2– rate of exchange at the time of settling the liability
April 2010 Payment
(25000 x 145) – (25000 x 152)
3,625,000 – 3,750,000
Exchange loss (125,000)
October 2010 Payment
(125000 x 145) – (125000 x 150)
18,125,000 – 19,000,000
Exchange loss (875,000)
December 2010 Payment
(200,000 x 145) – (200,000 x 155)
29,000,000 – 31,000,000
Exchange loss (2,000,000)
(ii) The loss is not deductible because it is unrealized.
(c) Annuity income is supposed to be included in the taxable income of a
taxpayer.
Excluding: in the case of an annuity which has been purchased, that part of the
amount of the annuity which represents the undeducted purchase price.
4. (a) (i) Persons carrying on any trade partnership shall:
- joint return in respect of such trade, together with such
particulars as may from time to time be prescribed.
- be separately liable for the rendering of the joint return.
- be liable to income tax only in individual capacities.
- have separate assessments made upon partners.
(ii)
Net profit as per accounts
Add back: Depreciation
Salaries
Interest on capital
Less: Capital allowances
Taxable profits
K’000
143 ½
720 ½
127 ½
K’000
777
990
1,767
____
1,767

8. 7
Distribution of Profits
Salary
Interest on capital
Balance 2:1
Total
K’000
720
127
920
1,657
Chiphazi
K’000
450
85
613
92
Chimwendo
K’000
270
42
307
619
Taxable income for Chimwendo
Profit Rental income
619+ 240,000 = 859,000
Tax
1st
Next
Balance
On K859,000
120,000 @
36,000 @
703,000 @
0%
15%
30%
= 0
= 5,400
= 210,900
216,300
(b) (i) There are two main types of clubs and associations which are
recognized under the Taxation Act and they are as follows:
Clubs which are formed or are operated solely or principally for
- social welfare
- civic improvement
- other similar purposes
- and which do not distribute any income to members
Those which are formed or operated solely or principally for
- pleasure
- recreation
(ii) Computation of taxable income for Chikolo Sports Club – financial
year to 31 December 2009_________________________________
Sale of food
Sale of drinks
TV shows
Live band performances
Gambling machines
6¼% ½
thereon =
K’000
125
80
140
600
960
1,905
119,062.5
(iii) Tax payable
Taxable income K119,062.50
Rate applicable 30%
Amount of tax 119,062.5 x 30% = 35,718.75

9. 8
(iv) The income will be assessed in the tax year to 30 June 2010.
5. (a) (i) A fringe benefit is any asset, service or other benefit in kind provided
by or on behalf of an employer to an employee where such benefits
includes an element of personal benefit to the employee.
(ii) Liability to fringe benefits tax arises where an employer provides
fringe benefits to an employee.
(iii) An employer who provides fringe benefits to employees is liable to
pay the fringe benefits tax.
(iv) Fringe benefits tax is due for payment not later than fourteen (14) days
after the end of each quarter.
(b) (i) (1) Employer is liable as the housing allowance is paid to a third
party.
(2) School fees will be taxable in the hands of the employee as it is
paid directly to him.
(3) Motor vehicle fringe benefit will be taxed in the hands of the
employer.
(4) The motor vehicle insurance is not a standalone benefit when
paid to a third party. It is a complement on the motor vehicle
benefit. No tax therefore arises whether to the employer or
employee.
However the amount for running cost which is payable to the
employee is taxable in the hands of the employee because it is
paid to the employee.
(5) The provision of a cook is a taxable benefit. The burden falls
on the employer.
(ii) Motor Vehicle fringe benefit
K
Cost of the vehicle 5,500,000
Taxable value 15%
 5,500,000 x 15% = 825,000
Quarterly value = 206,250
Tax at 30% = 206,250 x 30%
= 61,875
(iii) An employer will always provide security to business assets, like a
house even without occupation by an employee. Therefore the
employee’s security is seen as very secondary and therefore ignored.

10. 9
This is considered equitable because the primary purpose of the
expenditure is being recognised.
(c) (i) The imposition of penalties under the Taxation Act is meant to achieve
- compliance by the taxpayers
- the collection of revenue by government
- and enforcement of rules and regulations contained in the
Taxation Act.
(ii) In certain circumstances, the taxpayers might not pay the penalties as
they will appeal against the penalty and therefore no money will be
received.
Some penalties are too low to have the effect of improved taxpayer
compliance. Taxpayers will choose not to pay them as they realize
that the benefits they get by deliberate non compliance by far outweigh
the possible penalties.
)
6. (a) (i) One common feature between exempt and zero rated supplies is that
VAT is not payable in respect of both supplies.
(i) Main differences are:
- Exempt supplies are not subject to VAT while
- Zero rated supplies are subject to VAT.
- Input tax is not claimable in respect of exempt supplies while
- Input tax is claimable in respect of zero rated supplies.
(b) A taxable supply becomes relief supply when it is made to:
Individuals
Organizations: and businesses specified in the third schedule to the
VAT Act.
The user of the goods and services that qualify as relief supply enjoys an
advantage that no VAT is payable because of the relief that is given.
(c) A taxable person qualifies for input tax deduction in respect of supply of
motor vehicles or motor vehicle spare parts if the taxable person is in the
business of:
- dealing in motor vehicles, or
- hiring of motor vehicles; or
- selling of motor vehicle spare parts
However, where the taxable person uses the motor vehicles or motor vehicle
spare parts,

11. 10
- wholly
- exclusively; and
- necessarily for business
Such taxable person shall qualify for input tax deduction in respect of such
motor vehicles and motor vehicle spare parts.
(d) (i) VAT on raw materials
Value inclusive of VAT K1,980,500
 VAT 1,980,500 x 100 = 1,700,000
116.5
VAT inclusive value 1,980,500
VAT exclusive value 1,700,000
VAT = K280,500
(ii) Amount of output VAT
No output tax on exports
output tax on local sales: 3,400,000
rate of VAT 16½%
 VAT = 561,000
Total value 3,961,000
Total VAT therefore is
VAT on exports = 0
VAT on local sales = 561000
K561000
(iii) Output VAT total on both local and exports 561,000
Less input VAT:
on telephone 37125
on electricity 12375
on security charges 56100
on stationery 14025
on rentals 74250
on raw material 280500 474375
Net VAT payable 86,625
7. (a) (i) Rent payable 655,500
Withholding tax rate given 10%
 Expected withholding tax 655,500 x 10%
= 65,550
No, it was not correctly operated as he was supposed to have been

12. 11
deducted K65,500 but only K55,000 was withheld.
Penalties
There are penalties applicable to the tenant and not the landlord these
are:
- failure to deduct tax makes one personally liable to pay the
tax which was not withheld; plus 20% additional
tax if paid late.
- failure to operate a withholding tax scheme makes one guilty of
an offence punishable by a fine of K1,000.
(ii) Penalties for under deduction of PAYE are:
- 20% of the tax payable
- and a further additional 5% per month or part thereof as it
remains unpaid.
(iii) Income tax computation
K’000
Rent received 655
Salary received 7200
7855
Less:
Rates 45
Interest 140
Donations 10
Subscription 75 270
7585
Tax payable
Tax payable as given 2,234,100
Less : withholding tax 55,000
PAYE tax 2,000,000 2,055,000
Net tax payable 179,100
Tax on assessment 725,240
Tax over-estimated 546,140
(b) (i) Research and Experiments
The expenditure should not be of capital nature.

13. 12
The expenditure must be on experiments and research relating to the
trade of the taxpayer.
(ii) Bad debts
These may be allowed as a deduction where the debt has become bad
and therefore irrecoverable, during the year of assessment for various
reasons.
The Commissioner must be satisfied that the debt has become bad.
The amount of the debt must have been included in the income of the
taxpayer either for the current or previous year of assessment.
(iii) Doubtful debts
The doubtful debt may be allowed as a deduction if the debt is in
respect of a specific debtor where chances of recovery are uncertain.
The amount of the debt must have been included in the income of the
taxpayer for the current year or previous year of assessment.
Any doubtful debt allowed as a deduction in one year of assessment
must be included in the income of the taxpayer for the following year
of assessment.
E N D